This article first appeared in City & Country, The Edge Malaysia Weekly on April 17, 2023 - April 23, 2023

The Covid-19 pandemic greatly impacted the construction industry in Malaysia, with contractors struggling to meet deadlines and construction budgets due to lack of resources and manpower during the national lockdowns. This caused a lot of disruption in the industry over the past few years, which led to delays in construction progress and an increase in overall construction costs.

“Contractors are now either busy finishing what is in hand or tendering for new jobs,” Master Builders Association Malaysia (MBAM) president Oliver Wee tells City & Country in an interview recently.

While the construction market is getting back on its feet, Wee highlights that many contractors are still dealing with a variety of challenges, such as labour shortage, rising cost of materials and equipment, delays in obtaining project permits and approvals as well as the urgency to improve building and material quality in order to minimise losses in terms of profits and time.

The surge in prices of building materials has been one of the biggest challenges for the industry, among others. According to the Department of Statistics Malaysia, the unit price index of building and structural work materials increased by 1.8% year on year to 11.8% in December 2022.

“Many people think it (building materials price) has stabilised now from last year, but this is not true. It is still on an upward trend, just that the percentage [of price increase] has slowed down. The price is still fluctuating, which is why contractors find it difficult to tender for new jobs because they often get a very short validity of quotations, like only two weeks, while the whole duration of a job tender is a few months and completing a project takes years. The risk of being unable to complete a project within budget and incurring losses is very high due to the building material price uncertainty,” he shares.

As such, MBAM is promoting the adoption of a variation of price (VOP) clause for building materials to protect contractors and also to ensure smooth sailing of projects.

Wee explains that a VOP clause in a contract is precautionary and is recommended as it not only tackles the inflation of building material costs and relieves the burden of contractors, but also ensures cash flow and timely project completions. He adds: “With VOP, a client will give compensation to the contractor should building material prices rise to a certain percentage within a period from the date of signing the contract; if the building material prices drop to a certain percentage, the contractor will surrender a sum to the client.

“It is a win-win solution, as we [the contractors] reduce risk in completing a project, so we will be more willing to tender for a new job. Meanwhile, clients also do not have to worry too much that the project will be abandoned. For your information, we had 580 ‘sick’ projects last year alone as contractors were unable to complete jobs in time due to the current market challenges, including rising building costs and shortage of foreign workers,” Wee notes.

He adds that VOP may not be in favour of many developers, but it is an important preventive measure to avoid project progress being delayed or, worse, abandoned.

“It is true that a developer does not need to do this to ‘help’ the contractor, but think a step further. If the contractor cannot perform due to an escalation in price and has no choice but to stop work, it affects the developer’s cash flow, interrupts project planning and hurts the company’s reputation and brand. Contractors and developers are in the same ecosystem and they are closely related.”

For many years, contractors have been in a difficult position as they bear most of the risk in the construction ecosystem, according to Wee.

“Once we (contractors) get a job, we have to give a bond to the developer to guarantee our job performance. We also need to give our bond to the bank to get a loan to kick-start a project. However, when anything happens, let’s say the client winds up, we are the unsecured creditor. When we stop repaying the loan to the bank because we don’t get payment from the client, we will get sued. The risk and reward have never been balanced for us in the past,” he shares.

While Wee does not deny that the country saw a construction boom in the 1980s and 1990s amid rapid development during those years, the industry is now facing stiffer challenges and the profit margin has been badly affected. He thinks that industry growth has reached a bottleneck and it is time to review the future development plans and policies in the industry.

“We cannot afford to make many mistakes [in a project] because each is very costly now, and we realised that many of those can be avoided if we have more skilled labour, or adopt better building methods, such as IBS (Industrialised Building System),” Wee notes.

While he is certain that IBS is the way forward as it can mitigate building cost risk, minimise building defects, cut down on building wastages and shorten overall construction time, the adoption rate is still slow here in Malaysia, owing to the lack of motivation for change.

“Do you know that only the [IBS] manufacturers receive IBS incentives? Contractors and developers have zero incentive to use IBS. It is one of the reasons why developers and contractors are reluctant to change, even though we all know the benefits of IBS. To kick off IBS in Malaysia, we need to get all the stakeholders’ commitment to adopt it and the government is playing a very important role here as the engine of the transition,” Wee comments.

He adds that the construction industry will need more government support or incentives to encourage the use of IBS, such as tax exemptions on the purchase of heavy building machinery, especially the lifting crane, as most of the IBS components are heavy.

Meanwhile, Wee suggests that the government consider approving a higher plot ratio to help developers bring down the overall construction costs, as the cost of building with IBS is 5% to 8% higher than the conventional building method at the moment, due to a lack of economies of scale, specialised equipment, and professional skilled labour in the market.

“We have been enjoying cheap labour but it is not a long-term plan. The environmental sustainability issue aside, the quality of work is inconsistent, which leads to unnecessary costs and time spent on rectifying project defects after the completion of the project.

“It has to be changed at the macro level. To get everyone on the same page and move the industry forward, the government should offer more support and incentives to all three key stakeholders — the [IBS] manufacturer, the developer and the contractor,” Wee shares.

He adds that this is also an important milestone to achieve towards a more professional and advanced construction industry.

“Construction has always been known as a 3D job — dirty, dangerous and demeaning. It is why young people do not want to join the field. We need to change that. How? We need to be more professional, use more high technology and digitalise the industry.”

MBAM’s mission is to provide a strong voice for construction industry players on all pertinent issues and to facilitate growth and development for the industry. Besides being a representative voice in dialogues with the government, public- and private-sector organisations, MBAM is proactive in enhancing the professionalism and productivity of its members, gearing them towards global competitiveness.

“We organise study tours and training for our members, such as digitalising business using AI (artificial intelligence) as well as the use of drones and remote sensing devices. We also provide mediation services to resolve contractual disputes the cheaper and faster way.

“Currently, we are working with the CIDB (Construction Industry Development Board) on a review of the terms in a construction contract, which should be launched by the second half of the year. We are trying to fight for fairer and better terms for the [construction] players so as to balance risk and reward,” Wee explains.

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